If you've ever cringed at the thought of buying insurance or balked at the bureaucracy in the process, welcome to Lemonade (NYSE: LMND). And if you think a new and perhaps refreshing take on insurance is a sign of better business, you might want to consider investing in this innovative and socially conscious company.
Lemonade is fairly new in the insurance industry and was one of the hot IPOs in July. In the short time it's been on the market, the share price skyrocketed before coming back to a more reasonable valuation. Let's take a look at the company's model and see if the valuation makes it a good buy today.
Doing things differently
While technology has disrupted many industries, bringing customers more ease and convenience and changing the landscape for the establishment, insurance has been moving more slowly. But Lemonade, along with several other up-and-coming companies in the developing field of insurance technology (insurtech), has found a way to connect with young customers and make buying insurance quicker and simpler. It also has a charitable angle that speaks to groups who are motivated by making a difference.
Lemonade was launched in 2016 with a platform that uses artificial intelligence and behavioral economics to bring insurance into the digital age. The model's twist is that after Lemonade's 25% fee and claim payouts, customers can choose to donate the remainder of their premiums to charity. Lemonade is a certified B corp, a designation for for-profit companies that are socially motivated. This unique model is speaking to a new generation of homeowners.
Growing through giving
Lemonade markets homeowners, rental, and pet health insurance in the U.S. as well as contents and liability insurance in some international locations. The process works through two chat bots that do most of the heavy lifting for customer and claim assessments. Maya, the client intake bot, takes information from prospective customers and runs her many algorithms to present a price quote. Claims are processed by AI Jim and can be handled in as little as three seconds. Thirty percent of these are handled on the spot without any extra paperwork, and the rest are sent on to a live representative.
Lemonade takes 25% of the premium and passes on the remainder to a third-party reinsurer, which pays the company a fee and pays its share of a claim. The company's slogan is "Instant everything. No brainer prices. Big heart," which sums up its model and explains why it appeals to a generation that expects instant action and loves a cause.
As a fairly new company with a message that resonates with its target audience, Lemonade is growing rapidly. In the second quarter, customer signups increased 84% over the same period the previous year to 814,000. Premium per customer increased 17% to $190.
While Lemonade has yet to generate earnings, its adjusted gross profit increased 204%, and its gross loss ratio -- which measures how much of the premium the company pays out compared to what it keeps -- continues to improve each quarter, from 82% in the second quarter of 2019 down to 67% in the same period this year. Operating expenses increased over the quarter but decreased as a percentage of the gross earned premium (GEP).
The company projects gains in gross profit, GEP, and revenue for the coming quarter and for 2021. It's still in early growth mode and is not available in all states, and it has aggressive global expansion plans in the works. A massive 81% of customers are between the ages of 25 and 44, which means they have many years of customer-ship ahead of them. An even bigger 87% are buying home insurance for the first time. And while most of Lemonade's policy holders are urban dwellers and renters, a new suburban migration trend may benefit the company as these customers switch to home ownership and higher premiums.
Will it give to investors?
Lemonade will appeal to fans of ESG (environmental, social, and governance) investing, but long-term investors of all kinds should consider it as well. As an early star in insurtech, Lemonade is poised to benefit from ongoing tech trends. And as it catches the attention of the next wave of homeowners, the company has time to prove itself as a stable and profitable alternative to old-style insurance companies.
While Lemonade's stock raced out to a 200% gain from its IPO price of $29 in its first couple weeks of trading, it's since receded to near $61, a little under its day one closing price. That's still pretty high for a company that has yet to record a profit. Investors can expect volatility in the near term, but those who can handle the risk and are in it for the long term should consider Lemonade as a tech component of a diversified portfolio.
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